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Company demergers: a guide to the new regime

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The recently enacted Companies (Demerger) (Jersey) Regulations 2018 introduce a new demerger regime for Jersey companies. In addition to the new regime, a demerger by way of a court-sanctioned scheme of arrangement is still possible as an alternative under the Companies (Jersey) Law 1991 (the Companies Law).

Flexible structuring

The new demerger regime will be of particular interest to those who use, or are considering using, Jersey companies in their structures. It makes the use of a Jersey company more flexible and has a range of potential uses, including:

implementing a pre-sale reorganisation;

modifying a group structure to separate existing businesses and risks; and

restructuring a portfolio of assets.

As there is no requirement to seek court approval, the new demerger regime may result in significant cost and time savings for those looking to divide the undertaking, property, rights or liabilities of a company among two or more companies.

Demerger overview

The regulations introduce a simple new way for a relevant Jersey company (a demerging company) to demerge into two or more relevant Jersey companies (each a demerged company). One of the demerged companies will be a 'survivor company' (if the demerging company continues to exist on completion of the demerger), or all of the demerged companies can be new companies.

However, a Jersey company will be unable to demerge or become a demerged company using the new procedure if it:

is a cell company or a cell;

has unlimited shares or guarantor shareholders;

is registered under the Banking Business (Jersey) Law 1991 (ie, it carries on a banking business in or from Jersey);

is a permit holder under the Insurance Business (Jersey) Law 1996 (ie, it carries on an insurance business in or from Jersey); or

is under investigation in relation to an offence or has been charged with an offence and against which there is a criminal prosecution pending (until the outcome of the proceedings).

For the time being, the new regime will also be unavailable to Jersey companies that are liable to pay tax in Jersey at the company or shareholder level. This includes any Jersey company:

that is a financial services company within the meaning given in Article 3(1) of the Income Tax (Jersey) Law 1961 (the Income Tax Law) and is subject to tax under Article 123D thereof;

that is a utility company within the meaning given in Article 123C(3) of the Income Tax Law;

to which Article 123C of the Income Tax Law applies, where a Jersey resident individual ultimately owns (directly or indirectly) more than 2% of the ordinary share capital of the company;

that is a 'large corporate retailer' within the meaning given by Article 123I of the Income Tax Law; or

that is registered under Part 3 of the Goods and Services Tax (Jersey) Law 2007 (ie, it is a local company paying goods and services tax).

However, for all international (non-Jersey resident-owned) clients, these restrictions are unlikely to apply.

Demerger process

The demerging company must apply to the registrar of companies in Jersey to complete the demerger. The application must include the following.

Demerger instrument
Although there are no restrictions on what may go into the demerger agreement and it need not be very detailed, it must include:

whether the demerging company will be a survivor company or a new company;

details of the directors of the demerging and demerged companies (if a new company) or any board changes (if a survivor company);

details of any arrangements necessary to complete the demerger;

details of any payment to be made to a shareholder or director of the demerging company;

details of the undertaking, property and liabilities of the demerging company and, in respect of each demerged company, which parts of the undertaking, property and liabilities of the demerging company are to become the undertaking, property and liabilities of each demerged company (except that a liability attached to any property of a demerging company must not be separated from that property);

the proposed memorandum and articles of association of the demerged company (if a new company) or any amendments to the memorandum and articles of association of the demerging company (if a survivor company);

the demerged company's registered office; and

the manner in which any securities of a demerging company will be converted into securities of a demerged company (or confirmation of the kind of the payment that the holders will instead receive and how and when they will receive it).

The demerger instrument may also provide for circumstances in which the demerger may be revoked before its completion.

Board and shareholder approvals and confirmations
The following board and shareholder approvals and confirmations are required:

resolutions of the demerging company's directors that, in their opinion, the demerger is in the best interests of the demerging company;

a certificate of solvency given by each director who voted in favour of the demerger that they are satisfied on reasonable grounds that the demerging company is – and will remain until the demerger is complete – able to discharge its liabilities as they fall due. If the demerging company is insolvent and the directors cannot make the solvency certification, the Royal Court of Jersey must approve the demerger. To approve the demerger, the court must be satisfied that the demerger would not be unfairly prejudicial to the interests of any creditors or shareholders of the demerging company;

a certificate of confirmation given by each proposed director of each demerged company that the demerged company will be able to continue to carry on business and discharge its liabilities as they fall due for the 12 months after the signing of the certificate. If none of the directors of the demerging company will be directors of any demerged company, at least one of the directors who voted in favour of the demerger must also sign the confirmation certificate; and

special resolutions of the shareholders of the demerging company (and, where there is more than one class of shareholder, by a special resolution of each class of shareholder) approving the demerger instrument and altering the demerging company's memorandum and articles of association (if required).

Information rights
Creditors, shareholders and employees are entitled to certain information so that they can make informed decisions about the demerger. The demerging company must make available for inspection by its shareholders and creditors:

the demerger instrument; and

the proposed memorandum and articles of association of each demerged company.

The demerging company may remove commercially sensitive information from these documents before making them available for inspection.

Notice to tax authority
The demerging company must give notice of the demerger to the comptroller of taxes in Jersey by way of electronic self-certification. The certification must confirm that the demerging company:

is a Jersey company that is not liable to pay Jersey tax (ie, investor tax resident elsewhere or is a zero-rated company for tax purposes); and

has no shareholders who are liable to pay Jersey tax.

Following notification, the comptroller of taxes will either:

issue a tax certificate (showing a lodgement number) to the demerging company; or

advise the registrar that the demerging company is ineligible to demerge.

Shareholders and creditors
Similar to the merger procedure under the Companies Law, a shareholder has the right to object to a demerger within 21 days of shareholders having approved the demerger instrument.

Shareholders who voted against the demerger have a further 21 days after notifying their objection to the demerging company to apply to the court on the grounds that the demerger would unfairly prejudice their interests. If the court is satisfied that an objecting shareholder's application is well-founded, it may make such order as it sees fit to give relief to the complaint.

Notice to creditors
The demerging company must also:

give written notice of the proposed demerger to all creditors with claims of over £5,000 (of whom the directors are aware after making reasonable enquiries) within 21 days of shareholder approval of the demerger; and

publish such notice in a Jersey newspaper (or other approved method of publication).

If the demerging company is solvent, the notice must state that the creditor has the right to object to the demerger and may do so within 21 days of the date of the notice's publication. A creditor has a further 21 days following such objection to apply to the court for any order that the court sees fit in the circumstances. If the creditor's claim has not been discharged, this may include restraining the demerger from proceeding or modifying the demerger instrument.

Once the creditor notice period has expired or if all shareholders and creditors consent to the demerger, provided that the directors have complied with the relevant demerger provisions and the demerging company is solvent, the demerging company can apply to the registrar to complete the demerger.

Employees
The demerging company must:

give written notice of the proposed demerger to each of its employees within 21 days of shareholder approval of the demerger; and

make the demerger instrument available for inspection (the company may first remove any commercially sensitive information from the document).

Employees may object in writing to the transfer of their contract of employment under a demerger.

Consent required
If the registrar is satisfied that the application complies with the regulations, it will register the notices relating to the demerger.

A demerger will not need the court's consent unless:

it involves an insolvent company; or

an objecting creditor or shareholder applies to the court.

As with a merger between Jersey companies, the Jersey Financial Services Commission will not need to consent to a demerger, except where it has issued a licence or consent to a demerging company requiring transfer.

Completion and effect of demerger

Incorporation
Following the completion of a demerger, if the demerging company is a survivor company, it will continue as a demerged company together with one or more demerged companies that are new Jersey incorporated companies. If the demerging company is not a survivor company, it will cease to be incorporated as a separate company and will continue as two or more demerged companies that are new Jersey-incorporated companies. The registrar will issue the relevant certificates on completion of the demerger.

Property, rights and contracts
The property, rights, civil liabilities, contracts, debts and other obligations to which the demerging company was subject immediately before the demerger was completed will pass to the demerged company in the parts stated in the demerger instrument. If not stated, the default position is that:

all property and rights will be held jointly in common in equal parts by the demerged companies; and

all civil liabilities, contracts, debts and other obligations will be held jointly and severally by the demerged companies.

If a Jersey company has non-Jersey assets, local advisers should check for any additional requirements for their transfer.

Actions, legal proceedings and financial penalties
Subject to an order of the court:

all actions and other legal proceedings which were pending by or against the demerging company immediately before the demerger was completed may be continued by or against all or any of the demerged companies; and

the demerged companies will be jointly and severally subject to all financial penalties to which the demerging company was subject immediately before the demerger was completed.

Licences, authorisations and other permissions
Any licence (including an authorisation, certificate, consent, permit, registration or any other permission) held by a demerging company will not transfer to a demerged company on completion of the demerger unless the authority that granted the licence has consented to the transfer.

Employees, employment contracts and pensions
Contracts of employment between the demerging company and its employees will automatically transfer to the relevant demerged company with no change in terms and conditions, unless:

otherwise stated in the demerger instrument; or

an employee objects to a transfer of their rights or liabilities under an employment contract and gives notice of objection in writing before the demerger's completion date.

If the employee does not withdraw their objection before the demerger's completion, the employment contract will not transfer to the relevant demerged company. The contract will be treated as having terminated on the later of the completion date of the demerger or the expiry of any notice period applying to the employee's employment contract immediately before the completion date of the demerger, and the demerging company may make a payment to the employee in lieu of notice in respect of all or part of the relevant unexpired notice period.

Subject to the above, the demerger will not terminate employment contracts and will have effect from the demerger's date of completion as if between the employee and the relevant demerged company. In addition, any collective agreements which apply to employees and were in force immediately before the demerger will remain in effect.

The regulations contain further provisions relating to employees, including:

the transfer to a demerged company of information concerning employees of the demerging company; and

changes to employees' employment terms and conditions following the demerger's completion.

If, immediately before the completion date of a demerger, the demerging company provides a pension scheme and has a contractual obligation to pay a contribution, the obligation to pay contributions will transfer to the new employer company on the completion date of the demerger. The general rule under the demerger regime is that the new employer company must provide something broadly equivalent to the arrangements in place before the demerger. Because the regulations contain no detail relating to pensions, the demerger instrument should set out any provisions that may be required if the demerging company has any retirement schemes in place.

The materials contained on this website are for general information purposes only and are subject to the disclaimer.

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